"Private equity funds are out to make money, to invest money, and they've got money they want to put to work now," said Chip Clark, partner in the provider care sector in Ernst & Young's North America Transaction Advisory Services practice. The practice, among other services, advises corporate clients on merger and acquisition strategies.

Investments are likely to target small- to medium-size plans that won't elicit intense regulatory scrutiny, as well as Medicaid contractors likely to continue making money from growing Medicaid rolls and cash-strapped states, observers said.

Experts said investment groups now see the consequences of health system reform clearly enough to consider putting some money into health care ventures, even if major elements of the new health system have yet to take shape.

"Sustainability is going to require companies that can operate on thinner margins with a wider portfolio of products and services," said Paul Keckley, PhD, executive director of the Deloitte Center for Health Solutions, the health research services arm of Deloitte LLP. "A substantial amount of consolidation is very likely."

He said private equity investors he advises are watching for good opportunities in the health care industry, including health insurance plans. A business in the midst of a wave of change isn't necessarily a bad thing in their eyes, he said. "It's exactly what private equity looks for: sectors that are volatile, sectors where there's tremendous opportunity for synergy, sectors where you could pick up a pretty strong management team."

There have been some recent health insurance transactions already this year, notably the sale of MultiPlan, a New York-based medical claims processor that also operates a national PPO rental network.

MultiPlan purchased one of its largest competitors -- Viant, parent to the national Beech Street network -- in March. Two private equity firms, BC Partners and Silver Lake, bought MultiPlan from two others, the Carlyle Group and Welsh, Carson, Anderson & Stowe, in a deal announced July 8. Welsh Carson told Bloomberg Business Week, however, that it was interested in other health insurance deals.

Regulatory scrutiny may limit the size of upcoming deals, Clark said.

The U.S. Dept. of Justice has made clear it intends to enforce antitrust regulations vigorously when it comes to proposed health insurance mergers and acquisitions after years of less attention to the industry under the Bush administration.

Christine A. Varney, assistant attorney general in the Justice Dept.'s Antitrust Division, said in May that her department would not hesitate to block anti-competitive deals that would shut out potential new entries to health insurance markets.

The American Medical Association's most recent report on health insurance market concentration, based on data gathered by HealthLeaders-InterStudy from 2007, showed a still-shrinking degree of competition in the market. According to the report, as of Jan. 1, 2007, 99% of 313 metro areas had health insurance markets that would meet federal authorities' definition of "highly concentrated."

Because megadeals would attract heavy scrutiny, private equity deals will be more likely single acquisitions, not megamergers, Clark said. Even among the largest health plans, any acquisitions have been limited to small, single-market plans, such as Coventry Health Care's recent purchases of two hospital-run insurers.

"This would be just a change in ownership, so I don't think would raise a lot of scrutiny from the regulators," he said.

Despite the possibility of consolidation, concentrating some insurers' market power, life for physicians is not likely to change much if private equity groups buy up health plans, Keckley said.

He said Medicaid managed care contractors would be attractive acquisition targets thanks to budget shortfalls that will push states to look to the private sector to manage its Medicaid programs.

Clark agreed.

"I think the general thought is there's more interest and likely to be more transactions involving primarily Medicaid plans," he said. "Under health care reform, more dollars are allocated to state Medicaid programs, there will be a larger insured population, and likely a lot of those are going to be Medicaid beneficiaries."